Payday Loans: What to Know and
What to Avoid
If you’ve ever been short on money and far from your next paycheck, you may have considered a payday loan. These short-term cash loans are based on the income you’ll receive from your next paycheck. In other words, you’re borrowing from your own future income rather than a third-party funding source.

This article from Equifax explains how payday loans are risky options for borrowers. For starters, they have incredibly high interest rates—as much as 400 percent on an annual basis. If you were already living paycheck to paycheck, it may be incredibly difficult and stressful to pay back the loan, while covering your monthly expenses. However, if you’re one of the 40 percent of Americans who can’t afford an unexpected expense of $400, a payday loan might feel like your only option.

Payday loans are made by either specialized payday lenders or more general lenders that sell other financial services. You can easily find them via brick-and-mortar stores or online. Most payday lenders simply require the borrower to meet the following conditions in order to extend you a loan:

  • Have an active checking account
  • Show proof of income
  • Provide valid identification
  • Be at least 18 years of age

Payday lenders won’t usually run a full credit check or ask questions to determine if you can actually pay back the loan. Loans are made based on the lender’s ability to collect, not your ability to pay, so most often they create a debt trap that’s nearly impossible to get out from under.

Because the interest rate on a payday loan can be somewhat out of control, it’s important to be sure you can pay back the debt in a timely manner.

For example, let’s take what seems like a simple $400 payday loan with a two-week term. A typical fee for every $100 lent is $15. Therefore, in two short weeks, you’d have to pay back the $400 you borrowed, plus a $60 fee. Depending on your financial situation, that might be difficult to do. The Consumer Financial Protection Bureau (CFPB) says that in states that don’t ban or limit loan renewals or rollovers, the payday lender may encourage you to pay just the fee and extend the loan another two weeks. If you accept — or feel like you have no choice — you’d pay the $60 fee and still owe $460 when the extension is over. That would mean you’re spending $120 to borrow $400 for one month.

Before visiting a Payday Lender, call or stop in and talk with us. As your credit union, we’re here to help you through tough times and our goal is always to help you reach a point of financial wellness and sustainability.
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